Market update - December 2018

Weakness in global markets accelerated in December as concerns over rising US interest rates, continued geopolitical concerns and less synchronised global growth weighed heavily on investor sentiment.

During the month, the US Federal Reserve raised its benchmark interest rate by 0.25% to a range of 2.25% to 2.5%. While this was the fourth increase in 2018 and widely expected by investors, the Fed did lower its projections for future hikes in 2019. The European Central Bank announced it would stop its quantitative easing programme in January despite the slowdown in growth, instead focusing on the firming wage growth across Europe.

From a fundamental perspective, while some economic data points were weaker than expected, in aggregate economic data remained positive, with US growth expectations holding steady and global growth expectations only declining modestly. Oil prices continued to sell-off in December amid concerns of a supply glut and a global economic slowdown.

From a geopolitical perspective, ongoing trade concerns between the US and China thawed, with both countries commenting on the ongoing positive dialogue. Notably, the US announced a deferral in the 1 January 2019 tariff increases (from 10% to 25% on selected Chinese good) and China announced they would purchase a substantial amount of agricultural, energy and other goods from the US. Somewhat offsetting this positive tone was the arrest of a senior executive of Chinese company Huawei in Canada, at the request of the US. 

The Australian economy grew a meagre 0.3% over the third quarter, which was the weakest growth in two years. The slowing pace of expansion was largely driven by a sharp pull-back in household spending and non-residential construction.

The investment returns of the major markets for one and three months, financial year, and one year to 31 December 2018 are summarised below.

Market performance - 31 December 2018

Month

Quarter

FYTD

1YR

Australian Equities

-0.2%

-8.4%

-7.0%

-3.1%

Overseas Equities (Hedged into AUD)

-8.3%

-13.5%

-8.5%

-7.1%

Overseas Equities (Unhedged into AUD)

-4.2%

-11.0%

-4.3%

2.1%

Emerging Markets (Unhedged into AUD)

1.0%

-4.8%

-3.7%

-4.7%

Australian Property (Unlisted)

0.5%

1.4%

3.5%

8.8%

Australian Property (Listed)

1.7%

-1.7%

0.2%

3.3%

Global Listed Property (Hedged into AUD)

-5.9%

-5.5%

-5.1%

-3.0%

Australian Bonds

1.5%

2.2%

2.8%

4.5%

Overseas Bonds (Hedged into AUD)

1.4%

1.7%

1.6%

1.6%

Cash

0.2%

0.5%

1.0%

1.9%

Australian Dollar vs. US Dollar

-3.6%

-2.7%

-4.7%

-10.0%

Source – JANA, FactSet

The Australian equity market as measured by the ASX 300 fell 0.2% over the month, significantly outperforming global markets. The Telecommunications (-5.1%) and IT (-4.1%) sectors drove this decline over the month, while Materials (5.1%), Utilities (2.8%) and Health Care (2.4%) were the strongest performing sectors. Australian large caps (0.6%) outperformed, while small caps stocks (-4.2%) underperformed.

Hopes of a “Santa Rally” in global equity markets were short-lived, as December registered its worst monthly performance since 1970. This period of weakness was also combined with a material spike in market volatility. The US equity market fell in December for the second consecutive month, with the S&P 500 declining 9.1%.

The Australian dollar depreciated against all major currencies during December, falling to its weakest level since February 2016, on the back of weak China manufacturing data. The AUD fell against the USD (-3.6%), Yen (-6.9%), Pound (-3.4%), and Euro (-4.5%). In aggregate, the depreciation in the AUD resulted in MSCI World Index unhedged returns (-4.2%) outperforming hedged returns (-8.3%).

Australian and Overseas bonds delivered positive returns over the month.